With bull markets and upswings, even volatility and uncertainty are part and parcel of investing in financial assets. We can expect markets to remain volatile until the impact of the pandemic-induced economic strain and the current geopolitical crisis subsides. Unfortunately, human as we are, we often get emotional about our investments and tend to let market sentiments affect our investment decisions. A bad month or year can spook many equity investors to rethink their well-crafted investment strategies as they see their portfolio drop in value due to volatile markets. This knee-jerk activity frequently leads to untoward investing decisions, causing investors to convert notional losses into actual ones.
With volatility an inevitable aspect of investing in equities as an asset class, how can smart investors stay committed to their financial goals?
Here, we outline a few key considerations for investors when investing in equities to protect their portfolios from inevitable market risks.
Maintain a long-term horizon
You can avoid such investment blunders if you invest with a long-term outlook. The long-term view is nothing but a series of short-term journeys. If you can remain consistently invested in businesses with strong fundamentals and a future-ready outlook through short-term volatility, profitability is inevitable in the long run. A short-term view often encourages investors to follow the ideology of timing the market while jumping in and out of investments. For HNI portfolios with substantial values, this could mean more significant losses due to taxation, inflation, and hefty transactional costs. While investing in equities as an asset class, investors must consider the big picture, the ultimate goal for which they are investing. If their time horizon permits them to stay invested for 7 to 10 or even 20 years, then intermittent market volatility will have little or no effect on their overall portfolio.
For HNIs, wealth preservation is of utmost importance; hence their wealth creation journeys tend to take a more conservative route with calculated risks. They understand the cyclic nature of the markets and invest prudently. They even cautiously set aside reserves to take advantage of future opportunities when there is blood on the streets.
Rebalancing and Diversification
Investors often fall for a common misconception in a long-term buy-and-hold strategy. They believe holding shares of an organization for 15 to 20 years can assure gains. This notion may not be the case across all equity assets and can be disastrous for investors reaching their financial goal/term during a market downturn. For instance, consider specific market cycles, where small and mid-caps may have rallied due to favorable market conditions, and an inevitable market correction causes them to lose their sheen.
Even in a buy-and-hold strategy, there is an absolute need for investors to monitor their portfolio and ensure rebalancing is done periodically consistently. Diversification is another essential ingredient that should not be skipped, especially in an HNIs portfolio. Often, in a bull run, investors double up on equity assets within a specific sector, opening up their portfolios to risks of concentration. It is necessary to ensure an optimal asset allocation is maintained across sectors and asset classes while not exceeding a predetermined proportion that might impact the overall portfolio balance. This balance ensures the investor’s portfolios are well-diversified and mitigated against market risks.
Here are a few long-term basic investment rules to remember, especially in challenging market conditions:
- Avoid speculative investments, the risks and emotions involved are high, and the expectation of significant returns can turn into substantial losses too.
- Invest regularly both during downturns and market highs. It offers the benefits of rupee cost-averaging, power of compounding, and stability across market cycles.
- Maintain a well-diversified portfolio across asset classes and sectors. Consider allocating a portion of your assets to global investments to reduce the effects of market volatility.
- Remember, the financial markets function in cycles; every asset class has periodic highs and lows. Invest in financial knowledge that can help you decipher these market cycles better.
- Steer clear of investment decisions driven by emotional triggers or individual biases. Novice investors can take the assistance of a fiduciary in managing their investments portfolios and strategies prudently.
Choosing to stay invested (in quality investments) with a sound investing plan may be difficult, especially in volatile markets. However, investors will undoubtedly reap the benefits of their patience in the long term.
Do you have a robust investment strategy in place?